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Sustainable investment in action

Potential solutions for investors

Investments
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October 25, 2019

Sustainable investment is about improving investment outcomes — seeking better returns and lower risk.

We believe investors are now rightfully recognizing its central importance in their long-term success and taking the opportunity to embed it within their investment processes.

Last year we wrote “Sustainable investment: translating thinking into action.” This update showcases some of what we have been doing to deliver on that concept for our clients. The strengthening regulatory climate has added to the urgency of taking action, but the positive experience of leading asset owners that are successfully integrating sustainable investment is a great benefit to everyone on the sustainability journey.

In this update we highlight:

  • How we have captured long-term sustainability trends in private market allocations
  • New tools we have developed to integrate sustainability in risk management and asset allocation
  • Our expanding partnership with Hermes Equity Ownership Service (EOS)1 to strengthen our high-conviction solutions
  • A deep-dive research project into current stewardship practices

Altogether, we believe we have a way for all investors to address their sustainability needs. We are fully committed to delivering these potential benefits to client portfolios as we continue to research and develop more solutions to drive the industry forward.

Regulations: the shifting sand underneath sustainable investors’ feet

Unlike other countries in Europe, we believe the U.S. government has made the issue of environmental, social and governance (ESG), particularly in ERISA plans, a political one. Consequently, efforts to incorporate ESG issues into U.S. retirement plans have faced headwinds.

The Department of Labor (DOL) has issued multiple guidance documents on ESG considerations into the investments of retirement plans. The DOL’s view on ESG has changed with the political alignment of administrations. In 2015, the Obama administration issued “all else equal guidance.”2 Most investors took this to mean that if traditional financial analysis determines two securities are equally attractive, it is prudent for the plan to invest in the more ESG-friendly security. In 2018, the Trump administration issued guidance meant to clarify the 2015 regulation that emphasized investments’ financial performance must be first and foremost. 3

Even more recently, on April 10, 2019, the Trump administration issued an executive order that asked the Securities and Exchange Commission to investigate ERISA plans’ use of shareholder engagement as it relates to energy companies.4 Specifically, the order seeks to determine if ERISA plans are violating fiduciary duty by engaging in shareholder proposals that don’t increase a company’s financial performance.

Willis Towers Watson maintains that sustainable investment is a financially relevant input in assessing a security’s long-term financial performance. We believe our company’s approach has consistently aligned with the fiduciary duty of economic value spelled out in the most recent ERISA guidance. While regulations continue to shift like sand underneath our feet, it is our opinion that Willis Towers Watson’s approach is consistent: We seek to build out an investment platform that incorporates financially relevant ESG factors into the investment process. To date, Willis Towers Watson is aware of no ERISA plan that has integrated ESG and faced litigation.

Looking to the future

Sustainable investment has come a long way in recent years; however, there is much more to do. At the recent Thinking Ahead Breakfast Seminar, over 75% of the audience agreed that the pace of investor action on sustainability remained too slow.

We fully recognize the role we have to play in accelerating action, not least as an outsourced chief investment officer with $134 billion in assets under management as of March 31, 2019. Sustainability is once again central to the Thinking Ahead Institute’s agenda this year, and we are continuing to help investors tackle some of the biggest sustainability challenges including climate change, impact and universal ownership.

We’re absolutely committed to be at the leading edge of sustainable investment and help drive industry progress across our research, solutions and client delivery.

Disclaimer

The information included in this presentation is intended for general educational purposes only and does not take into consideration individual circumstances. Such information should not be relied upon without further review with your Willis Towers Watson consultant. The views expressed herein are as of the date given. Material developments may occur subsequent to this presentation rendering it incomplete and inaccurate. Willis Towers Watson assumes no obligation to advise you of any such developments or to update the presentation to reflect such developments. The information included in this presentation is not based on the particular investment situation or requirements of any specific trust, plan, fiduciary, plan participant or beneficiary, endowment, or any other fund; any examples or illustrations used in this presentation are hypothetical. As such, this presentation should not be relied upon for investment or other financial decisions, and no such decisions should be taken on the basis of its contents without seeking specific advice. Willis Towers Watson does not intend for anything in this presentation to constitute “investment advice” within the meaning of 29 C.F.R. § 2510.3-21 to any employee benefit plan subject to the Employee Retirement Income Security Act and/or section 4975 of the Internal Revenue Code.

Willis Towers Watson is not a law, accounting or tax firm and this presentation should not be construed as the provision of legal, accounting or tax services or advice. Some of the information included in this presentation might involve the application of law; accordingly, we strongly recommend that audience members consult with their legal counsel and other professional advisors as appropriate to ensure that they are properly advised concerning such matters. In preparing this material we have relied upon data supplied to us by third parties. While reasonable care has been taken to gauge the reliability of this data, we provide no guarantee as to the accuracy or completeness of this data and Willis Towers Watson and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any errors or misrepresentations in the data made by any third party.

This document may not be reproduced or distributed to any other party, whether in whole or in part, without Willis Towers Watson’s prior written permission, except as may be required by law. In the absence of its express written permission to the contrary, Willis Towers Watson and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any consequences howsoever arising from any use of or reliance on the contents of this document including any opinions expressed herein.

Views expressed by other Willis Towers Watson consultants or affiliates may differ from the information presented herein. Actual recommendations, investments or investment decisions made by Willis Towers Watson and its affiliates, whether for its own account or on behalf of others, may not necessarily reflect the views expressed herein. Investment decisions should always be made based on an investor’s specific financial needs.


Endnotes

1. In the United States, Willis Towers Watson’s partnership activity is at the public policy level only. Other services mentioned are carried out by Hermes for some Willis Towers Watson clients internationally, but not specifically for those clients that are based in the U.S.
2. Federal Register Interpretive Bulletin Relating to the Fiduciary Standard Under ERISA in Considering Economically Targeted Investments, A Rule by the Employee Benefits Security Administration, October 26, 2015.
3. U.S. Department of Labor Employee Benefits Security Administration, Field Assistance Bulletin No. 2018-01, April 23, 2018.
4. Executive Order on Promoting Energy Infrastructure and Economic Growth, April 10, 2019.

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Craig Baker
Chief Investment Officer

Adam Gillett
Head of Sustainable Investment

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